Video: On 8 March Energy Post held a conference in Brussels, sponsored by Nord Stream 2, moderated by our EU correspondent Sonja van Renssen, where Gazprom’s pipeline project was debated in the context of the future of the European gas market. The panellists are: Tim Boersma (Columbia University), Paul Corcoran (Nord Stream 2), Jean-Arnold Vinois (Jacques Delors Institute) and Katja Yafimava (Oxford Institute for Energy Studies).Â
Nord Stream 2, Gazprom’s pipeline across the Baltic Sea, planned to be built alongside the existing Nord Stream 1 pipeline, is a hotly contested project, especially in Brussels. On Energy Post, we have published half a dozen articles with various perspectives. See for example Agata Loskot-Strachota’s article “The case against Nord Stream 2”, for a critical view, and Karel Beckman’s article “Who’s afraid of Nord Stream 2?, which argues that there is no good reason to want to stop the project.
At the conference we held in Brussels, four types of arguments were discussed: economic, climate, legal and political. You can click on the video to see the highlights.
Below we discuss some of the arguments that were exchanged.
The economic angle
The economic rationale for the project, said Paul Corcoran, CFO of Nord Stream 2, is first of all the growing “gas import gap” Europe is confronted with. This can be simply visualised in the following graph, based on EU data:
The projected demand in 2035 is of course speculative (see below under “climate angle”), but Corcoran’s projection is not overly optimistic from an industry perspective, as it shows no growthl, and is in line with independent estimates from the European Commission. The decline in domestic EU gas production is virtually a certainty, unless EU countries were suddenly to massively embrace shale gas, which is highly unlikely.
The import gap can be met in various ways, but the main contenders are additional Russian supply and new LNG supplies from the US, with some supplies coming from the Caspian region through the Southern Gas Corridor. Corcoran argued that “the market will decide” which gas it wants to buy.
According to Corcoran, Nord Stream 2 will also increase both security of supply and competition in the EU gas market. The main reasons:
- It provides the most direct access to some of the world’s biggest and cheapest-to-produce gas reserves.
- Offers an additional transport system to Europe.
- Adds more liquidity to the market, which may stimulate new connections.
These arguments are based on effects of the pipeline on the EU as a whole. Nord Stream 2 does have different effects on different parts of Europe, though. For North West Europe, and Germany in particular, it is a boost. For Eastern Europe, especially Ukraine (not an EU member) and Poland, access to Russian gas and gas transit will be diminished.
In addition, critics of Nord Stream 2 would argue that bringing more Russian gas to Europe will not increase security of supply, but only make Europe more dependent on Russia. Then again, as Katja Yafimava, Senior Research Fellow at the Oxford Institute for Energy Studies (OIES), said in Brussels, in the end it is Europe’s own choice whether or not to buy the gas: “No one is forced to buy Russian gas.”
The climate angle
Nord Stream 2 will bring more Russian gas to Europe – but does Europe need more gas in the first place, given its ambitions in climate policy?
Jean-Arnold Vinois, energy policy advisor at the Jacques Delors Institute and former Director-General Energy at the European Commission (at the time when Nord Stream 1 was built), argued in Brussels that EU climate and energy policy implies that Europe should reduce gas consumption and imports from external gas suppliers and invest in renewable energy instead.
“I don’t believe one minute that we will have a consumption of 473 bcm in 2035”, said Vinois, “because that means a complete failure of all the EU energy policy and energy union objectives.”
Vinois pointed out that “In economic terms, the EU has much more interest to develop its renewables capacity than to import gas from Russia or from any other external supplier. Why would you pay an external supplier, when you have the opportunity to use local employment and domestic resources? … And you are reducing your CO2 footprint and improving your security of supply at the same time.”
“These are economic impacts which should be looked at”, said Vinois. “Sometimes it is said renewables are a luxury, but if you see that the reduction of the import bill has been about €40 billion a year and subsidies for renewables around €70 billion, it is still a good investment.” He concluded that “Nord Stream 2 is just an expression of the past”.
Vinois acknowledged, however, that Nord Stream 2 is a private investment that receives no public subsidies. “So if Nord Stream 2 is willing to take that risk, then they should do so.”
Paul Corcoran took the view that gas “can support the transition to a renewable economy”, because it is flexible and the least CO2-intensive of the fossil fuels.
He said gas demand had been affected in recent years by the economic slowdown and the failure of CO2 pricing which has led to gas-to-coal switching (“hardly a success for EU policy”), but was confident that gas demand would be stable going forward. He also said he was “personally skeptical of the potential of biogas”.
The legal angle
A very different discussion took place around the legal aspects of Nord Stream 2.
Yafimava, a specialist in EU gas regulatory affairs, pointed out that there were two issues at stake here. First to what extent Nord Stream 2 should be subject to the Third Energy Package, which requires ownership unbundling and third party access of pipelines, among other things. Second whether Nord Stream 2 conforms to the principles of the Energy Union.
With regard to the Third Energy Package, some such as City Law School professor Alan Riley (see here), have argued that Nord Stream 2, although it is an offshore, import pipeline, should be subject to the Third Energy Package, which would mean severe restrictions on the ways in which it could be used by its owner, Gazprom.
The Nord Stream 2 company rejects this notion and argues that all offshore pipelines that have thus far been built to supply the EU, including Nord Stream 1 and pipelines in the Mediterranean Sea are not subject to the Third Energy Package. To make an exception for Nord Stream 2 would be discriminatory, says the company.
Yafimava said that “there is a strong legal argument that the Third Energy Package does not apply to Nord Stream 2”, but “discussions continue”, she added. “The EU and Member States are hardly able to stop construction of Nord Stream 2 on the basis of the existing acquis [EU law]”, she pointed out.
As Yafimava noted, the European Commission has yet to make any official pronouncement on this issue. Vinois ascribed the silence of the Commission on this crucial matter to “internal differences”.
As to Nord Stream 2’s compliance with Energy Union objectives, Yafimava noted that the Energy Union is not part of the EU acquis and so cannot be used to evaluate the project.
Critics of the project have repeatedly argued that Nord Stream 2 violates the objectives of the Energy Union, such as increased security of supply. President of the European Council Donald Tusk for example has written that “… any new infrastructure should be fully in line with the Energy Union objectives.” But according to Yafimava, these objectives are open to different interpretations and as long as they are not part of the EU law cannot be used as legal arguments against the project: “Any attempt to stop Nord Stream 2 on this basis would effectively amount towards the EU making a political decision.”
Some critics have said that Nord Stream 2 is currently being built in a “legal void”, but Corcoran rejected this notion. He noted that the company submitted a construction permit application in Sweden last year and is expecting to file permit applications in Russia, Finland, Denmark and Germany in the coming months under the respective environmental laws of these countries. Further, the pipeline is subject to UNCLOS (United Nations Convention on the Law of the Sea) inasfar as it traverses international waters, said Corcoran.
The political angle
Whether or not the EU could or should make a political decision to block Nord Stream 2, or to limit its use, is another bone of contention.
Vinois said that the building of any new major gas pipeline always has a political dimension to it, but he stopped short of arguing that the EU should prevent the pipeline from being built.
The problem of making Nord Stream 2 subject to political decision-making is that the EU’s energy policy has always been aimed at creating a liberalised gas market free from political interference. As Tim Boersma, Senior Research Scholar at the Center on Global Energy Policy at Columbia University in New York pointed out, the EU has been quite successful in creating a competitive gas market structure that allows any supplier to deliver gas to the European market on the basis of the same rules, including Gazprom. “If the European Commission now does not like the outcomes of [its] liberalised gas market, then we may need a debate about market structure instead”, he said.
Critics of Nord Stream 2 say that the Russian invasion of the Crimea and the war going on in Ukraine have changed the political context fundamentally. The EU, in this view, should support Ukraine against Russian interference. To allow a pipeline to be built that would deprive the Ukraine of an important source of income and leverage towards Russia, would mean to cave in to Russian pressure, so this argument goes.
Boersma wondered whether the EU is really doing Ukraine a favour by helping it to maintain its transit monopoly. The status quo has not really worked for Ukraine, so should we try to maintain it, he asked? Instead he made a plea for economic reform in the country: “A lot of the answers lie in the Ukraine itself. There is a lot of potential there, which could be developed, with the help of European partners.”
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Mike Parr says
A quibble: “Vinois pointed out that “In economic terms, the EU has much more interest to develop its renewables capacity than to import gas from Russia or from any other external supplier” – renewables do not, generally replace gas (indeed – you could argue the reverse) but energy efficiency programmes aimed at buidling fabrics could have/will have a big impact on demand – couple that to a move to electric heating (& yes RES could play a role) and this points to a declining role for gas – although it might have one as a chemcial feedstock – maybe.
Jose DeSouza says
Mr. Vinois’ dissenting voice is a lonely, weak and dwindling one against the other panelists’ very well-balanced viewpoints. Geopolitical side issues should not be allowed into what’s a purely economic discussion about how to let the market work in the European Union’s best interests. His claims about renewables taking over imported gas (from whatever source) also seem too unsubstantiated to be taken seriously. No actual data provided. His claim about the possibility of Gazprom rigging prices as a result of the increased supply through Nordstream 2 should also be challenged and exposed as opportunistic unless definitely proved otherwise. Actually, the Russian market is an excellent outlet for European exports which can be paid for by abundant and cheap Russian gas. Not to mention that the Russian government would be shooting itself in the foot if it tried to gouge gas prices bound for Europe as a result of pipeline dominance. Gas trading is all about delivering it at competitive prices. Russia wouldn’t be so silly as to kill its ‘cash cow’ as desperate (status quo) Ukraine seems to be trying to do, caught in the middle of a geopolitical dispute where it has everything to lose.
Raphaël Grandeau says
The new Gazprom-supported project Nord Stream 2 has been received with open hostility by the European Union. This new gas pipeline project, which plans to give birth to a Nord Stream 1’s twin – two pipelines of a combined capacity of 55 billion cubic meters – would lead to an overall 110 bcm stream flowing through the Baltic sea from Russia directly to Germany.
Many critics point out the inappropriate business case that justifies the required CAPEX to launch the project. However, two arguments show that this reasoning is not valid.
First, it is true that the EU will need to import more gas in the years to come. The latest Reference Scenario (July 2016) published by the European Commission shows that the net imports of gas will steadily increase from 300 bcm in 2010 to 370 bcm by 2050, due to a decrease in the gas internal production (essentially Dutch & UK supply) coupled with a projected stable consumption. Such rise in gas imports is then naturally interesting for any supplier, especially for Russia from whom the EU already imports a third of its gas supply. This might also explain why EDF’s current strategy is focusing on gas production centers.
Second, independent to any market studies, the underlying rationale in the gas energy sector is absolutely not governed by a pure economic calculation. Above any other factors, gas relies on geopolitics. A quick glance at the investment strategies will suffice: the initial prospective shareholders of Nord Stream 2 (Shell, Eon, OMV, Engie and BASF/Wintershall) suddenly left Gazprom alone in August 2016, after a strong lobbying campaign from Poland and Slovakia. Those two gas transit countries, along with Ukraine, have naturally nothing to win with the construction of Nord Stream 2 – such bypass will prevent them from earning transit revenues, as it is already the case with Nord Stream 1.
The political question of security of supply is then central to understand the stakes of the project. And the EU should not be too reluctant to have a potential new gas infrastructure.
First, the decision of Gazprom to invest in Nord Stream 2 shows the dependence of Russia on the EU: 80% of Gazprom exports in gas are directed toward the EU (2016). Despite a clear desire to expand toward China, notably embodied in the ongoing construction of the Power of Siberia pipeline, Gazprom still sees the EU as a major client in the next decades to come – and dependency works both ways. Gazprom also no longer makes a unanimous consensus in Russia – new internal players such as Rosneft are undermining Gazprom’ supremacy.
Second, even though the EU wants to diversify its gas imports through LNG, as recently expressed by the Commission which is pushing for investments in LNG terminals and storage infrastructures, one has to bear in mind that Asia accounts for 75% of the LNG demand and this share is not likely to change in the years to come. Playing on the LNG market will mean to face price competition with Asia: will this scenario bring a more resilient gas supply to Europe?
Third, the Nord Stream 2 will integrate a European energy market that is becoming more secure for price creation. It is hard to see how the project can dismiss the application of EU regulations when it enters the territorial seas of Germany and Denmark. The Third Energy package should then ensure antitrust measures. And current changes in the gas market also suggest that a pure Gazprom monopoly in EU’ supply is unlikely to occur: long-term contracts were for instance re-negociated in 2008 and replaced by discounts and systems of partial spot indexations.
All in all, the EU should be working on building a more competitive gas market, which encompasses new gas infrastructures such as Nord Stream 2, rather than taking emotional decisions based on political blockage with Russia that will never contribute to creating a more stable energy supply.
Sources:
– To put it in perspective, France consumed around 50 bcm in 2016 (GRT Gaz, 2017)
– Gazprom 2016: http://www.gazpromexport.ru/en/statistics/
– On the asymetric positions of Russia and China over Power of Siberia, see this article by Dr Pierre NoĂ«l: https://www.iiss.org/en/politics%20and%20strategy/blogsections/2017-6dda/january-7f20/power-of-siberia-2a1d
– EU Strategy for LNG and gas storage 2016: https://ec.europa.eu/energy/sites/ener/files/documents/1_EN_ACT_part1_v10-1.pdf
The Commission suggested that the European Fund for Strategic Investments could be used for example.
– EY study 2016: http://www.ey.com/gl/en/industries/oil—gas/global-lng–new-pricing-ahead—lng-demand-growth